Thursday, November 17, 2011

American company eyes Maple Leafs

A U.S. investment company is interested in buying the Toronto Maple Leafs.

Nine months after the Ontario Teachers’ Pension Plan announced it was selling its 80 per cent stake in Maple Leaf Sports & Entertainment, the Star has learned that the company has caught the eye of a huge U.S.-based private equity firm with a track record in sports and media.

Providence Equity Partners has inquired about Teachers’ stake in Maple Leaf Sports, a person familiar with the matter said, but it’s unclear whether it has made a formal offer.

Providence Equity’s interest comes at a time when marquee sports franchises are commanding more than $1 billion, making it increasingly difficult for wealthy individuals to purchase teams.

“Now it’s all about the financial play and the investment, not the emotion or getting into the locker room,” said Brian Cooper, a former Maple Leaf Sports executive, who is now president of S&E Sponsorship Group, a sports consulting company.

Teams that have been bought out by private equity firms and their founders include the National Basketball Association’s Detroit Pistons and the Philadelphia 76ers.

MLSE has added a popular soccer team and outdoor stadium to its list of assets in recent years and has a flurry of successful real estate projects. The Leafs’ average ticket price, for instance, is twice that of the Stanley Cup champion Boston Bruins, said Bob Stellick.

“They’ve done an unbelievable job maximizing revenue,” said Stellick, a Toronto-based sports marketing consultant. “They’ve taken their last speck of land and turned it into valuable condos and they’ve done better than anyone could have expected getting the most out of their ticket revenue.”

Where Maple Leaf Sports stands to make more money is in broadcasting.

Industry officials say Maple Leaf Sports’ next big-picture investment could include folding Leafs TV and NBA Canada TV, both little-watched digital channels, into a regional sports network styled after Yankees Entertainment and Sports Network. YES Network, which started in 2002, broadcasts more than 130 New York Yankees games a year.

A pioneer in television sports, the YES Network also broadcasts games of the Yankees’ minor-league affiliates and replays of classic games, and it has shown a televised game in 3D.

Providence is one of the original investors in the YES Network. While the YES Network doesn’t release financial details, analysts have estimated its annual revenue as more than $435 million. The network itself is said to be worth $3 billion.

Others have followed the YES Network model. Time Warner in California is creating a regional sports network built around the Los Angeles Lakers, and the University of Texas recently created the Longhorn Network.

Rogers Communications has shown interest in purchasing MLSE for the same reasons that Providence would want to buy the company: to maximize TV profits. Rogers, which already owns baseball’s Blue Jays, has multiple publishing platforms, such as cable, radio and wireless, and has the institutional knowledge to start a sports channel like the YES Network.

That MLSE has languished on the market has surprised some. But the debt markets are still reeling three years after the U.S. economic meltdown, which means it is more difficult for an investor to use borrowed money to pay the $1.5 billion that Teachers’ is believed to be asking for its stake.

“It used to be you could put up 10 to 15 per cent of a deal in cash and find a group to lend the rest,” said Larry Grimes, a Maryland-based sports investment consultant who has advised on the sale of Major League Baseball teams. “Today, the cash requirement is more like 35 or 40 per cent. That’s going to make you think twice.”

The NHL’s cloudy labour picture is yet another complicating factor, with the league’s agreement with the players association up next summer. The NBA has locked out its players and the basketball season is in jeopardy.

According to internal financial statements obtained by the Star, MLSE estimated it would make a profit of $105 million this year on revenue of $477 million. It's unclear how much of that revenue comes from hockey. Forbes magazine recently estimated the Leafs generated $168 million last season, some $30 million more than the company made from the Raptors. Several analysts, however, say the gap between the Maple Leafs and Raptors’ revenue is even more pronounced than Forbes’ estimate, meaning a potential NHL work stoppage would be more damaging to the company.

It’s possible neither Rogers nor Providence ends up with the company. Minority owner Larry Tanenbaum has the right to match any offer for Teachers’ 80 per cent interest.

One person close to Tanenbaum said he would consider matching any offer to buy out Teachers’ and then file an initial public offering for Maple Leaf Sports, a move that would be both complex and controversial.

While such an offering would probably be wildly popular with investors, the NHL and the NBA would both probably oppose such a move because it would make public more of their internal financial information. But it’s unlikely that the leagues could do anything to stop a public stock listing.